Case law: Clause deleted from draft contract irrelevant to whether that clause should be an implied term of the final contract

Parties negotiating a contract should ensure the contract is comprehensive and clearly and unambiguously expressed, to avoid disputes about its meaning or whether additional terms should be implied into it, a recent case makes clear.

An employee entered into a contract agreeing to repay a loan made to him by his firm if he stopped being a partner in it. In fact, he was only an employee and had never been a partner. When he left, the firm argued that a term should be implied that he repay the loan anyway.

In the dispute that followed, the Court of Appeal noted that the first job of a court dealing with a dispute about what a contract means is to consider the ordinary and natural meaning of the words used in it. If they are ambiguous, the court should apply established rules of interpretation. It is only as a last resort that the court should consider whether to imply a term into the contract.

However, it went on to consider whether to imply the term the firm was arguing for. It applied the usual rule that a term can only be implied into a contract if it satisfies the strict test that the term is necessary to give business efficacy to the contract (so, if the contract works without that term in it, the term will not be implied), or so obvious that it goes without saying.

The rules also require that the term a party is arguing should be implied into the contract must be capable of clear expression, and not contradict any express term of the contract.

In this case the Court ruled that the term was not necessary for the efficacy of the contract, even though a term similar to the one the employer was arguing for had actually been included in drafts of the contract, but removed before the final draft was agreed. In this respect, the Court said that although clauses deleted from drafts could be evidence of what a clause meant if it was ambiguous, they could not be relied on as evidence that a term should be implied into the contract.

Operative date

• Now

Recommendation

• Parties negotiating a contract should ensure it is comprehensive and clearly and unambiguously expressed, to avoid disputes as to what it means - or whether additional terms should be implied into it

Case law: Bou Simon v BGC Brokers LLP [2018] EWCA 1525